There’s a lot to unpack in the proposed R1.43bn takeover of Prescient’s financial services businesses by Stellar Capital Partners.
I’m not a big fan of Stellar — yet. I’m not enamoured of the mix of investments; I like Torre for the longer term (the short term looks iffy), but I struggle to work up enthusiasm for Tellumat and Cadiz.
I am quite fond of Prescient, though. Its fund management style suits the prevailing market volatility and it smartly shifted into administration services as regulations on financial service providers grew more onerous.
What I suspect has hindered sentiment for Prescient is that it has suffered annual setbacks in the past few financial years that weighed down earnings.
First there was the unexpectedly hasty retreat from an international foothold, and more recently the loss of a couple of big institutional mandates. Prescient, nonetheless, has still managed to grow assets under management, which now stand at R74bn. In short, I believe the Prescient takeover is value-enhancing for Stellar.
The bigger question is what’s really in it for the faithful Prescient shareholders. There are three options, based on the financial services business being sold out of Prescient for an effective 85c/share and the technology hub, under PBT, remaining behind in the listed company. The deal mechanics entail the financial service assets being bundled into a newly created entity, PFH, which will declare an 85.54c/share dividend.
Shareholders can bank the cash, "re-invest" in unlisted PFH shares or elect to receive new shares in Stellar at 171c/share.
The PFH executives will take shares in unlisted PFH, securing 40% of that entity. Stellar could, depending on actions taken by Prescient shareholders, end up with 40%-49% (with a BEE deal pending). Commendably, Prescient shareholders may take a combination of all three options — a part cash payout, some unlisted shares in PFH and some Stellar paper. But I doubt too many shareholders will "hedge" their bets. I’m also not sure Prescient minority shareholders will want to hold shares in an unlisted entity, which probably means the toss-up is between Stellar paper and cash. I would be inclined to take the cash — even though the collective value of the transaction is considerably less than the 130c/share fair value for Prescient that I (and a few miffed minorities) have been keeping in mind.
PBT is certainly worth more than the 13c/share value implied by Prescient’s share price. During its brief tenure as a standalone listing (it reversed into the Wooltru shell), it carried a market capitalisation of over R400m. If PBT (mainly database) generates R30m/year at bottom line, then at 15 times earnings the company should be accorded a market value of around R450m. That’s equivalent to around 27c/share. Then factor in investment properties (in Dublin and Johannesburg), which could fetch another R50m-R60m.
Taking the cash settlement, I would argue, gives Prescient shareholders flexibility. I’d argue there’s more downside than upside potential in Stellar’s shares — noting Torre’s short-term trading prospects and fickle market sentiment. If Stellar appeals as a longer-term investment option there may well be a better time to buy in for less than the offer peg of 171c/share. And, since the market might take a while to familiarise itself with the operations, PBT might also drift down to where more scrip is worth accumulating.